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A False Alarm About China

The volatility in Chinese equity prices in recent months has more to do with the peculiarities of the country's stock markets than with underlying economic fundamentals. As long as China continues to pursue pro-market reforms, its economy will thrive in the long term.

MANILA – To hear some pundits tell it, China’s economic miracle – one that lifted 300 million people out of poverty and shifted the world’s geopolitical center of gravity – is coming to a tumultuous end. The volatile stock market and the renminbi’s “surprise” depreciation are signs of imminent economic collapse, according to this view, as risky investments and high levels of government debt put the brakes on decades of turbo-charged output growth.

Fortunately, there is little reason to believe such dire predictions, or that the market gyrations that have been driving recent headlines represent anything more than short-term volatility. After all, equity-price movements are a poor predictor of the real economy’s performance.

Indeed, when Chinese GDP was growing strongly during 2010-2013, stock prices were falling. More recently, when stock prices began soaring during the first half of 2015, the economy’s slowdown had already begun. As the American economist Paul Samuelson famously quipped, “The stock market has called nine of the last five recessions.”

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I believe that this article provides a fairly accurate analysis of the fundamental strengths of the Chinese economy.

In my view, the fundamental strength of the Chinese economy is its real economy. The Chinese government has always focused on keeping the wheels of its real economy moving and retaining its global competitiveness by helping to lower costs of production in manufacturing in all possible ways.

I am glad that that Chinese stock market crashed. Stock markets are no good places for people to invest their savings. Rise in speculative investments invariably locks away invest-able resources in speculative spirals and dries up the flow of resources to the real economy.

I am sure that the Chinese government now realises the futility of perking up the speculative stock markets. Speculative markets not only create short term volatility but also result in long drawn recessions.

There is no need for the emerging economies to follow the failed policies of free markets and floating exchange rates unless they want to send their economies also on roller coaster rides.

Well contrived regulatory frameworks, which help strengthen global competitiveness and at the same time expand domestic markets will be the key to the continued success of emerging economies.

I think Mr Wei underestates the impact of investments. Investment share of Chinese GDP today is a whopping 45%. Knowing that falling investments usually trigger recessions I think we should pay more attention to the current unsustainable high level of investments in China.